HECM Overview
The Home Equity Conversion Mortgage (HECM) is the oldest and most popular reverse mortgage product, accounting for an estimated 90 percent of the total market. Available since 1989, HECMs are insured by the federal government through the Federal Housing Administration (FHA), a part of the U.S. Department of Housing and Urban Development.
The amount of money a borrower is eligible to receive depends upon the person’s age, appraised home value, and current interest rates. The older an individual is and the more valuable the home, the more money a person may receive.
The home’s location can play a factor too. The limit at which FHA is willing to insure a loan varies by county and is adjusted annually. Currently (for 2007), the FHA loan limit varies from $200,160 (for rural areas) to $362,790 (for high-cost areas). If a home’s value exceeds the FHA lending limit, the amount of available funds is calculated as if the value of the home is the area limit. Practically speaking, if your home is worth $600,000, but the county lending limit is $362,790 (current maximum limit), the loan amount will be based on $362,790.
As part of the closing costs, the homeowner must pay a mortgage insurance premium (MIP) equal to 2 percent of the maximum claim amount (lesser of the home value or county lending limit) up-front, plus an annual premium thereafter equal to 0.5 percent of the loan amount. The insurance premium guarantees that if the loan servicer goes out of business, the government will step in and make sure the homeowner has continued access to his or her loan funds. Furthermore, the MIP guarantees that the borrower will never owe more than the value of the home.
An origination fee is charged by the lender as well as any traditional closing costs, such as title insurance, attorneys fees, recording taxes, etc.
